5 Renewals: Market in 2013 Catastrophe premiums down 11% globally at the 1 st January Catastrophe premiums down 20-25% in Florida at 1 st January Dramatic changes in terms introduced late in renewal season: Unlimited hours clauses on some major programs Reinstatements pro rata as to time (some with a minimum of 50%) Terrorism included in some major programs for free Berkshire Hathaway offers to take 7.5% of AON Re book automatically. Increasing competition for workers comp catastrophe reinsurance and conversely limited appetite for working layers. Casualty Reinsurance renewing flat/down 5% but improvement of terms at 1 st January 2014.

6 Market in 2013 Woodroffe s Predictions in 2013 Global reinsurance supply will continue to be in excess of demand for Although market adequately capitalized there is limited choice of carrier for captive reinsurance buyer. Inflation beginning to grow around the world. Danger to the Bond Portfolios valuation for reinsurers and insurers (the ultimate loss?). Workers Comp and Transportation lines show signs of hardening in 2012 and expected to continue through Domestic insurance markets scrutinize profitability of accounts. Medical PL insurance company/captive s consolidation continues.

16 Reinsurance Strategies Scrutinize Security Fronting Carrier (downgrades for Tower, Meadowbrook, QBE and others?) Review security carefully. Reinsurance Security (American Safety Re now in run off) Avoid weak balance sheets, legacy issues and companies with no long term capital commitment. Stick with trusted Reinsurers Especially if you have built a bank of premium with them.

17 Multi-Year Excess of Loss Client buys $10m xs $1m Umbrella from Standard markets every year. Premium is $1.5m per annum. Limited frequency; one loss every five years. 3 years on, client has bought $30m worth of excess insurance with little chance of full utilization. Premium is Dead Money.

18 Answer: Multi-Year Excess of Loss Provide client with 36 month policy with one limit of $10m xs $1m stretched over 3 years. Cost approx. $1m per annum with profit commission of 30-40% upon commutation at year 5. Use of Trigger additional premiums to reduce cash flow. Provide reinstatement of limit at clearly defined pre-agreed costs. Client saves money with no losses, saves money with average losses and has survivability and continuity at no extra cost in the event of catastrophic loss. No cap in hand return to excess insurer.

23 Tactics and Tricks cont. Make little into big multi year contracts. Mid year adjustments if uncertain about target price. Be conservative about estimated premium income. Pay as you go reinstatements only pay for cover if you need it.

24 Insurance Linked Securities Cat bonds allow insurers to get reinsurance protection from a new pool of capital separate from traditional reinsurers such as money managers, hedge funds and pension funds. Investors capital stays in segregated collateral accounts if event occurs funds are available to make a payment, thereby virtually eliminating credit risk inherent in traditional reinsurance Guy Carpenter estimate $10bn of new capital entered the reinsurance market largely in the form of ILS, side cars and collateralized retro cover. GC securities estimate that the cat bond market alone could reach $23bn by the end of 2016.

27 Fronting Overview Fronting Arrangement In its most common form, an insurance carrier (front) writes and issues policies, makes necessary state filings and pays premium taxes. The fronting company will then cede the entirety of the risk to the Captive. The fronting company assumes the legal obligation while economically, the risk resides with the Captive It is imperative that the interests of the Front and Captive are aligned. Otherwise, complications can arise 2

29 Fronting Overview Several Business Reasons Exist for Fronting Arrangements The need for a licensed carrier in a state where the risk resides The need for a carrier with a minimum A.M. Best rating The need for other financial strength measures 4

30 Challenges Facing Captives While Captive formations are on the rise, Fronting continues to be one of the biggest challenges facing Captives Fronting Fees Fees can vary and their magnitude can make it difficult for the Captive to make an adequate margin or stay competitively priced in the market Collateral Requirements Collateral requirements can potentially be arduous for the Captive Collateral typical takes the form of: Funds withheld from the Captive A Trust Agreement funded by investment securities of the Captive Letter of Credit issued by a bank on behalf of the Captive Financial Strength of the Fronting Carrier Failure or downgrade of the Front will likely cause the Captive to seek an alternative, thus disrupting operations and increased costs Service issues and personnel changes can also have an adverse effect 5

32 Old American County Mutual About Our Company We specialize in non-standard private passenger automobile insurance, with a tradition of aiding the higher risk auto insurance needs of an underserved, economically diverse customer base. Through our partner MGA s, we offer insurance products and payment plans that provide affordable insurance for Texas customers. We partner with and grant contractual rights to approximately 25 skilled MGA s. We cede 100% of our premiums to well capitalized, A rated reinsurers, some of which include: Dorinco Main Street America Markel JRG Re Tokio Millennium 7

37 County Mutual advantages Surcharge Rating flexibility County Mutual insurers are exempt from the Texas Insurance Code provisions prohibiting the use of surcharges for motor vehicle violations. Assessments While not specified by law, most Independent County Mutuals historically have not received TAIPA assessments. This is due to the large number of policies produced in underserved regions and earn credits for producing such policies. Regulatory & compliance County Mutual insurers eliminate procedural burdens for MGA s as they respond directly to Texas Department of Insurance (TDI) for matters involving compliance, rate, rule and form filings, complaints and licensing. Withdrawal MGA s are not subject to the Withdrawal Plan Guidelines and Restrictions imposed by the Texas Insurance Code, Chapter 827. County Mutuals still retain a significant advantage making them a desirable alternative to insurance companies wanting to write private passenger auto insurance in Texas 12

38 Old American advantages Endorsements OACM has twenty (20) approved endorsements for use with the standard Personal Auto Policy allowing MGA s to customize their product and coverage. Symbols & Territories OACM has developed proprietary Territory, Liability and Physical Damage Symbol Models allowing for sophisticated pricing alternatives. Analytics OACM skilled and insightful staff can provide a complete array of actuarial services including Product Development and Market Analysis, Pricing, Rate Filing Support and Regulatory Compliance. Comprehensive Audits OACM s experienced audit team provides an in-depth review and analysis of MGA s procedures to help ensure compliance at all levels of the operation. Regulatory and Legislative Involvement OACM has a strong relationship with the TDI and actively monitors legislative matters relating to Texas automobile insurers and policyholders. 13

39 Contact Information Andrew Kirkpatrick Vice President of Business Development (214)

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